Bank is an organization that provides a range of financial and some non financial services to its customers. The main source of income, that makes the bank survive is the interest charged from those to whom the bank has given loan. A bank accepts deposits from its customers and pay interest to that deposited money, while it lends money to those who need finance and charge interest from them. The interest rate chargeable from the borrowers is higher than the interest rate payable to depositors. This is how a bank, which is traditionally known to normal people, earns revenue. Banks can be brodly categorized as retail banks and investment banks. The above mentioned revenue generating procedure is more applicable to a retail bank. The revenue models of investment and merchant banks are different, which we will discuss in this article.
Investment Banking
An investment bank is a financial institution that engages in the issuance of securities on behalf of its client. Investment banks are the banks, which facilitate both the investor, who is in search for good investment opportunity and the investee, who is searching for capital to invest in viable projects. Unlike other types of banks, investment banks are not accepting deposits from customers; that is, investment banks do not provide regular banking services to the general public. The main Investment banking activities are issuance of securities, underwriting of securities, providing financial related consultancy services to companies, assisting companies in the acquisition and mergers, and similar services.
JP Morgan, Bank of America, Merrill Lynch, Goldman Sachs, Morgan Stanley, and Credit Suisse are some of the world renown investment banks.
Merchant Banking
Merchant bank is a bank that mainly deals with international financial activities such as foreign real estate investment and long term company loans. Merchant banks do not provide regular banking services to the general public. Nowadays, merchant banks provide underwriting services and consultancy services for wealthy institutions, as well as individuals. Issuance of letter of credit, international fund transfer, foreign corporate investment and foreign real estate investment are some examples of services offered by a merchant bank. Merchant banks offer capital in exchange for share ownership. The main sources of income of a merchant bank are fee for the consultancy that they provided and interest for the capital provided. Some of the financial institutions mentioned above (e.g: JP morgan) have begun as merchant banks.
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What is the difference between Investment and Merchant Banking? Even though, a fine line separates a Merchant bank from an investment bank, there are some differences between them. – Traditional investment banks only engage in the underwriting of shares and issuance of shares, whereas merchant banks involve in international financial activities. – While traditional investment banks assist companies in the acquisition and merges, merchant banks are not. – Normally investment banks focus on share issuance of large private and public companies, whereas merchant banks look after small scale companies. – While merchant banks still offer trade financing to their clients, investment banks rarely offer this service. – Investment banks offer advisory services for acquisition and mergers, whereas a merchant bank provides little or no of such services.
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